FTX Auditor Agrees to $1.95M Settlement Over Negligence Allegations

International accounting firm Prager Metis has reached a $1.95 million settlement with the United States Securities and Exchange Commission (SEC) for alleged misconduct in its audits of the now-defunct crypto trading platform, FTX, as well as separate charges that it violated auditor independent rules.

Auditor to Pay $745K for FTX-related Allegations

The SEC accused Prager Metis of negligence-based fraud, alleging that from February 2021 to April 2022, the accounting firm issued audit reports for FTX that wrongly said they followed Generally Accepted Auditing Standards (GAAS). 

The company did not properly evaluate its ability to conduct these audits, especially when it came to the risks involving FTX’s connection with Alameda Research, a hedge fund tied to FTX.

Without admitting or denying the claims, Prager Metis agreed to pay a $745,000 civil penalty and take remedial actions, which include retaining an independent consultant to review and evaluate its audit and quality control processes and abiding by certain restrictions on accepting new audit clients.

Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, said that this case aims to enhance investors’ interest as well as serve as a warning to auditors about the consequences of not following the law properly. 

He emphasized that protecting investors depends on auditors being independent and doing their work carefully.

“Because Prager’s audits of FTX were conducted without due care, for example, FTX investors lacked crucial protections when making their investment decisions. Ultimately, they were defrauded out of billions of dollars by FTX and bore the consequences when FTX collapsed,” Grewal said. 

FTX Auditor Faces Other Charges

In addition to the FTX-related penalties, Prager Metis also faced separate charges for including improper legal protections in agreements for more than 200 audits between 2017 and 2020. 

The accounting firm agreed to pay $1.2 million in civil penalties and pre-judgment interest to settle those charges. The settlement is subject to court approval.

FTX, was once one of the largest crypto exchanges however the firm collapsed in November 2022 due to a severe liquidity crisis and allegations of fraud. 

The company filed for bankruptcy, and Sam Bankman-Fried, its founder and CEO, was sentenced to 25 years in prison. Last week, the convicted FTX founder formally appealed the decision, claiming judicial bias in the case.